The response of global equity indexes to U.S. monetary policy announcements

This paper analyzes the impact of U.S. monetary policy announcement surprises on 15 foreign equity indexes in Asia, Europe, and Latin America. Using high-frequency data, I find a large and significant response of foreign equity indexes to U.S. monetary policy surprises at short time horizons. On average, a hypothetical unanticipated 25-basis-point cut in the federal funds target rate is associated with a ½- 2½% increase in foreign equity indexes. This paper also provides evidence that U.S. monetary policy surprises, and by extension changes in U.S. interest rates, affect foreign equity indexes through their discount rate component. This finding suggests that U.S. monetary policy may be a risk factor in global equity markets.